The Lowdown on Reverse Mortgages
Wouldn’t it be nice to have your mortgage company pay you, rather than the other way around? Believe it or not, some people do receive monthly proceeds from their mortgage company. But this isn’t something just anyone can do.
What is it and how does it work?
A reverse mortgage is a loan for homeowners age 62 and older that lets them access a portion of their home’s equity, and uses the home as collateral. These types of loans are for people who have their homes paid off, or mostly paid off, though.
With a reverse mortgage, you don’t make payments like you would with a regular mortgage; instead, you take payments from the equity you’ve built over the years. The bank is essentially lending you back the money you’ve already paid on your home, and charging you interest at the same time. You generally cannot use more than 80 percent of your home’s equity.
Who qualifies for a reverse mortgage?
As mentioned earlier, those who are 62 years and older qualify for a reverse mortgage loan. Here are some other qualifications:
- Own your own home
- Have a considerable amount of equity
- Use the home as your main residency
- You must complete a financial assessment
- Have no federal debts
- Have sufficient cash flow to continue paying home expenses (HOA, maintenance, etc)
- You must apply and get approved by a lender
Types of Reverse Mortgages
There are three kinds of reverse mortgages: federally-insured reverse mortgages (also known as Home Equity Conversion Mortgages or HECMs), proprietary reverse mortgages, and single purpose reverse mortgages.
- The Federal Housing Administration’s HECM Reverse Mortgage
The HECM is the most common type of reverse mortgage. If you’re 62 or older, you can qualify for an HECM loan and use it for anything–bills, home renovations, vacationing, etc.
- Proprietary Reverse Mortgage
Proprietary reverse mortgages aren’t federally regulated like HECM loans because they’re offered up from privately owned or operated companies. Because of this, they can offer higher loan amounts, but also higher interest rates. These types of loans may even let borrowers access more of their equity than the typical federally-insured ones.
- Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is offered by both governmental agencies and nonprofit organizations. Unlike the HECM, this type of loan puts limitations and restrictions on how you spend the money. The lender has to give the green light on how the money is spent before a loan is approved. Generally, single-purpose reverse mortgages are to be used toward property taxes and home renovations, so loan amounts are typically smaller than HECM. And because they’re also not federally insured, they have no mortgage insurance premiums.
The Pros and Cons
One benefit to a reverse mortgage is that you don’t have to make monthly payments. If you’re in a tight spot financially in your life, a reverse mortgage can be really helpful. You still need to cover your taxes and homeowners insurance, however.
Another benefit is you can opt to receive your money in one lump sum, as a line of credit, or disbursed monthly. Depending on the type of reverse mortgage you get, you can elect how to use the money you receive– whether that be for home renovations, a vacation, paying your bills, paying property taxes, or something else.
As with all good things, however, there’s always some type of catch. The reverse mortgage also has its disadvantages…
Often reverse mortgage loans can be expensive. How can that be when you’re collecting monthly checks, though? For one, these types of loans require additional premiums and fees. And the interest rates are typically high. While the bank lends you back the money you’ve already paid on the home, they are also charging you interest at the same time. This can really eat up your home equity.
You aren’t the only one affected by the reverse mortgage either. For instance, if you die before you’ve sold your home, your heirs have two options:
- Pay of the reverse mortgage in full, in addition to all the interest that’s built up over the years
- Give up the house to the bank.
Some other disadvantages include:
- Foreclosure in case of your unexpected absence
- A surviving spouse may be excluded
- Some governmental benefits can be affected
If you are considering a reverse mortgage, speak with an expert at Northern Title to weigh out all your options. We have offices all throughout Utah, Idaho, and Wyoming. Call us today at 435-752-3600.